Question

For every​ $1,000 of annual​ income, households maintain average cash balances ​(their demand for money​) of​ $200. How will growth in GDP affect interest​ rates, holding the money supply​ constant? Use the liquidity preferenceLOADING... frameworkLOADING.... ​1.) Using the line drawing​ tool, show the effect of growth in GDP using the liquidity preference framework. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium interest rate and quantity of money. Label the point​ '2'. Carefully follow the instructions​ above, and only draw the required objects.

Answer 1

Following are the solution to the given question:

Step-by-step explanation:

Due to an income of $1000 per year, the average household that used demands $200 per year, however with the expansion in GDP, individuals' annual incomes also will increase, and therefore their need for money would also rise. the equilibrium real interest rate will be i2 instead of i1 just at the beginning. As a result, the quantity of money supply will stay like that at Q.